Analysis & Opinion

KUALA LUMPUR Feb 28 (Reuters) - Malaysia's central bank
tightened rules on the fixing of onshore rates for the ringgit
currency on Thursday in a move aimed at improving the integrity
of the rate-setting process that other regulators in Southeast
Asia are expected to follow soon.

Bank Negara's new rules are part of wider efforts to
overhaul the process of setting key currency rates after the
scandal over the London interbank offered rate (Libor), and as
evidence emerges that traders at Singapore banks were colluding
to manipulate the foreign exchange market.

The move marks a shift away from a set of rates overseen by
a banking association in Singapore that was found to have been
subject to attempts at manipulation. The set includes spot
currency and interest rates for the Singapore dollar,
Thai baht and Indonesian rupiah, ringgit,
and Vietnamese dong.

Bank Negara said from March 1, the calculation to fix the
ringgit rate against the U.S dollar will have to be based on
quotes with a bid and ask spread of not more than 10 pips. A pip
is the smallest unit of a currency in dollar terms, equivalent
to one-hundredth of a cent.

"The revised methodology for the fixing will ensure that the
rates used in the fixing calculation are tradable rates and the
derived fixing rate appropriately reflects the market rates,'
the central bank said in a statement.

Two sources with direct knowledge of the plan earlier told
Reuters that Bank Negara asked the association to increase the
number of banks contributing to the ringgit reference rates to
15 from 11.

Underlying this is a move to promote Southeast Asian
countries' own onshore currency reference rates. Central banks
in both Malaysia and Indonesia have already directed local banks
under their jurisdiction to use domestic reference rates instead
of the Singapore benchmarks.

They would like banks to price derivative contracts such as
foreign exchange forwards against those reference rates, rather
than using ones set in Singapore.

Bank Negara's plans are unlikely to have an impact on
currency market flows, traders said. The Malaysian currency rose
nearly 0.4 percent on the day to 3.0895 per dollar, breaching a
200-day moving average at 3.0940.

The ringgit appreciated 3.5 percent against the U.S. dollar
last year as foreign investors flocked to Southeast Asian
markets, but it has slipped more than 1 percent so far in 2013
on growing political uncertainty ahead of general elections.

The Malaysian currency was the second most traded in
Southeast Asia after the Singapore dollar in 2010 although it
accounted for just 0.3 percent of total global foreign exchange
market turnover daily, according to the Bank for International
Settlements (BIS).

"Malaysia and also Indonesia markets need to be deep enough
to generate high quality rates," said Professor Jin-Chuan Duan,
director of the Risk Management Institute at the National
University of Singapore. "Or else, it becomes difficult to
achieve."

TAKING AIM AT SINGAPORE'S FX MARKETS

Central banks in Southeast Asia had discussions in February
to look at ways to overhaul the reference rates. They were
mainly targeting Singapore's foreign exchange market, the second
biggest in Asia after Japan, that has frustrated their efforts
to control their domestic currencies.

At the centre of these regulators' concerns are
non-deliverable currency forwards (NDFs), which allow hedging or
speculation on emerging market currencies that cannot be
directly or freely traded due to exchange controls.

The contracts are settled in U.S. dollars, so there is no
exchange of the underlying currency, although they reflect
investor expectations on a currency's direction and can affect
spot exchange rates.

"Whether it's Libor or the Singapore case or anywhere else
in the world, central banks need to test the prices, test
traders from these banks," said National University of
Singapore's Duan. "They need to see if these traders would
stand by their bids and offers."

The Monetary Authority of Singapore said last year it was
working with the Association of Banks in Singapore and the
Singapore Foreign Exchange Market Committee to review the way
the NDF rates are set.

This came hot on the heels of U.S. and British regulators
cracking down on manipulation of Libor, which is used to set
interest rates for around $600 trillion worth of securities.

STABILITY

Malaysia has a reputation of moving quickly to defend the
ringgit. The country slapped on capital controls and pegged the
ringgit to 3.80 per dollar during the Asian financial crisis in
1997 and 1998, blaming speculators including George Soros for a
34 percent plunge in the currency then.

While Bank Negara removed the dollar peg in 2005, a ban on
offshore trading of the ringgit has remained in force ever since
the crisis.

Analysts said any possible steps towards internationalising
ringgit trade was out of the question with the Libor scandals
and the news of forex rate-rigging in Singapore. Strong inflows
into Southeast Asia has also kept the Malaysian central bank
cautious.

"The Malaysian central bank wants stability and is taking a
pre-emptive move," said Irvin Seah, an economist with DBS Bank
in Singapore. "I don't think you will see negative reaction in
the financial markets as Bank Negara is trying to smooth out the
financial imbalances."